When discussing SEC Enforcement many focus on the type of cases, the number of matters filed and the amounts of money ordered to be paid. Offering frauds, insider trading and financial fraud are some of the key areas that are discussed. Yet the underlying theory for virtually all of the cases brought by the agency is disclosure. Fundamentally, the SEC is a disclosure agency, ensuring that investors are furnished with the material facts.

The recent case involving the former Chairman of the Board of Directors of Nissan Motor Co. Ltd. centers on the question of disclosure. Specially, the case focuses on the claimed efforts by the former Chairman, with the assistance of Gregory Kelly, a Director and others to conceal the full amount of his compensation to avoid adverse public reaction. SEC v. Ghosn, Civil Action No. 1:19-cv-08798 (S.D.N.Y. Filed Sept. 23, 2019).

Nissan is a Japanese auto manufacturer whose securities are traded on the Tokyo Stock Exchange and has sponsored ADRs that trade in the U.S. in the OTC markets and through brokerage firms. Nissan is exempt from registering its securities in the U.S. as long as translated English language copies of its foreign securities filings are available on the internet for U.S. investors. The firm is also required to publish English translations of its annual reports along with the financial statements, interim reports, and press releases. The company published its annual reports in accord with these requirements as well as those of Japan’s securities regular. That report includes a corporate governance section disclosing director compensation.

Prior to 2009 Japanese firms such as Nissan were only required to disclose the total amount of compensation paid to all directors. After 2009 firms were required to include in the corporate governance section of the report individual director compensation where it exceeded 100 million yen.

Following the change regarding the disclosure of director compensation, Mr. Ghosn became concerned about possible criticism in the Japanese and French media if his total compensation was disclosed. To avoid this result, the Chairman and his subordinates executed a scheme to defer portions of the compensation he awarded himself each year. Thus, for example, the company annual report for fiscal 2009 stated that Mr. Ghosn’s compensation was $$13 million. The additional $2 million he was awarded was not disclosed. In 2010 the firm’s annual report stated that Mr. Ghosn’s compensation was $11 million. The additional $9 million he was awarded was not disclosed. Messrs. Kelly and Ghosn both approved the filing of the reports. This pattern continued through fiscal 2017.

During this process Mr. Ghosn began searching for ways to be paid the undisclosed remainder of his compensation. After considering several options he, and those assisting him, settled on the idea of using letter agreements which would memorialize the amounts as postponed compensation. Included in the letter agreement was a provision which protected the executive from currency price changes.

The first was executed in April 2011, backdated, and covered the undisclosed compensation for 2009 and 2010. The letter stated that the amount was for compensation that had been postponed. It included a chart showing the amounts to be paid. Payments were to begin in the first year after his retirement. A similar letter was executed in 2013. Records were also prepared to memorialize the amounts of deferred compensation for the period 2013 through 2017. Mr. Ghosn was assisted with this process by certain employees, including Mr. Kelly.

During the period, steps were taken to secure payment of the deferred compensation. For example, misrepresentations were made to induce the firm to record sums as expenses to a company program. Later, when the shareholders voted to discontinue the Nissan pension program for directors, Mr. Ghosn arranged to have the amount due him increased by about $50 million. That sum was actually disclosed in the reports of the company based on backdated documents.

Over the period from 2009 through 2017 Mr. Ghosn had total fixed compensation of $186 million of which $94 million was deferred. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See also In the Matter of Nissan Motor Co., Ltd., Adm. Proc. File No. 4086 (Sept. 23, 2019)(failed to disclose compensation; settled with cease and desist order based on Exchange Act Section 10(b) and the payment of a $15 million).